The accusation that is now being proven is that certain individuals and banks manipulated key interest rates to serve their own purposes. Sometimes, it was for excess profit. Other times, it was just to show that the bank was in a stronger position that it really was.
The ethical considerations are perhaps best left to judges and priests – we wanted to draw attention to the technical point: the rates the banks submitted were based on “quotes”, not actual transactions. This meant it was easier for humans to fudge the “quote” in a way you can’t with real data.
And the number of people quoting was tiny: just 16 banks for sterling LIBOR. Hardly a big sample.
While the financial world grapples with the ramifications of this scandal, the online world has moved on: RateSetter is where the rates are set by the users, not by reference to bank rates. The Monthly Access market references thousands of actual transactions a day to determine the Market Rate. Real orders, thousands of people.
In his report on the scandal, Martin Wheatley, head of the new FCA called for real transactions to be used, not quotes. Sounds like the online consumer world is ahead of the times…!
Rhydian is rather passionate about this idea: “I love markets. That’s why I wanted to set up RateSetter – to bring a live market to a moribund savings world dominated by a few banks. The fact that it’s our customers who are the rate-setters as opposed to 16 banks is a sign of how the internet can democratise all sorts of things, including the previously opaque world of interest rates.”
2012 will be remembered for many things, whether your interests lie in sport, the arts, politics… even financial services. It was a monumental year for both RateSetter and the wider world of peer to peer lending – the year the sector “came of age” as one commentator put it. Twelve months ago, RateSetter had matched £13m in 3,500 loans, and we felt excited by the prospect of more growth in 2012. One year on, we have matched £45m and well over 10,000 loans. There have been many highlights; below we have charted just a few.
January saw a record – our first time matching over £2m in a single month – with strong New Year demand. We were already aware of some of the restrictions our site was putting on us, and we started plotting a new version. It wouldn’t be unveiled for some months, as Development was furiously working on our next release which was to come in February with the introduction of the first ever P2P 1 Year Bond. This would prove to be an extremely popular product with Lenders, alongside a new 5 Year Income market.
April was a new record month, £2.6m matched which took us through the £20m barrier, and saw the launch of our referral programme. An indication that P2P would be viewed favourably as applicants for the Business Finance Partnership was announced. Whilst we didn’t apply for money through the scheme, it demonstrated that Government were taking a keen interest in our emerging sector.
Imminent staff arrivals in May predicated a change in office space – moving upstairs a floor in our Southwark home to a much larger space to accommodate expansion. We hosted 50 lenders for drinks at the Coat and Badge on the river in London – Peter and Rhydian were quizzed expertly on a number of topics, not least regulation (more of that later). A night out for some of the team resulted in a much coveted gong at the Moneywise Most Trusted awards – “Highly Commended” in the Loans category. Lenders were reassured as the Provision Fund continued to grow – reaching £500k in June – and continues to ensure that every Lender has received every penny…. (all right all right… I’ll stop banging on..)
Whilst everyone else took the summer off to watch the Olympics, we launched a new website the day after the Opening Ceremony. An enormous piece of work completed by a small team, we were pleased to bring a new approach to the RateSetter experience. We continued to develop and innovate on the new platform (with more to come in 2013).
The new site also prefaced our first £3m month in September: by now, all our internal teams had grown and the engine room was purring nicely. That solid growth continued into October, a new record, as we celebrated our second birthday, and this new level of business was sustained throughout the rest of the year. In the US, Lending Club matched it’s 1 billionth dollar, demonstrating the scale that P2P can achieve in the right environment. November saw more lender improvements on the website, with the ability to split the reinvestment of capital and interest, and to automate withdrawals to your bank account introduced.
December was billed as being a month of big news as the government announced that it would regulate the sector as part of 2013’s Financial Services Bill, with formal regulation to start in April 2014. P2P was given another boost with news that it had been awarded government investment – RateSetter chose not to ask for additional lending funds as part of this deal, but it formalised the government’s positive response to peer to peer lending ahead of formal regulation.
So as a hectic and momentous 2012 comes to a close, on behalf of RateSetter, we’d like to thank everyone who has participated and made it such a fantastic year. Here’s to making 2013 even better.
Happy New Year!
Top 5 Peer to Peer Articles of 2012 (in our view)
Best on P2P: Anthony Hilton: London Evening Standard
Best on Regulation: James Hurley, The Daily Telegraph
Best Front Cover: Investor’s Chronicle (see right)
Best on Borrowing: Richard Dyson, Mail on Sunday
Best Consumer View: Martin Lewis, MoneySavingExpert
There has been so much talk of financial regulation over the last few years that you are probably sick and tired of hearing about it. So… a big subject, but a short post.
I spend a lot of my time at RateSetter on the subject of regulation. Discussing it with law-makers and regulators, fielding questions from the media, talking over the phone with customers. From day one, I have believed a degree of regulation was appropriate for peer-to-peer finance as it grows and I am delighted that the industry has been genuinely proactive on regulation, coming together to form the P2PFA being just one example.
Most industries avoid regulation; the simple message from peer-to-peer finance is that we welcome the discussion of it. I don’t believe regulation is a panacea – far from it, the best thing to protect customers is the integrity of the people running financial services businesses. If you try to over-protect, you risk stifling everything as well as a dangerous complacency that kids people there is no risk in the system… which is what causes mis-pricing and bubbles to emerge.
But I do believe a sensible framework for peer-to-peer finance makes sense and good regulation can absolutely help that. The devil, of course, will be in the detail – for regulation to be proportionate and sensitive to the model; to offer oversight and rules without pointless restriction and burden. Peer-to-peer offers the customer fantastic value and choice – that is why it is growing – and that should continue.
You can see here in the Rules & Operating Principles of the P2PFA how we think peer-to-peer should be regulated. A blueprint, if you like. These principles are meant to be proportionate, place the burden on the operator, not the customer and, crucially, allow an objective framework that can accommodate peer to peer in many forms and products. The key is that the operator itself is sound, offering customers a robust platform through which they can exchange value. We blogged about this back in August 2011 – when the P2PFA was formed – and the same philosophy holds today.
That’s enough from me. What I would like to hear is what would you, the people actually using peer-to-peer finance, want from regulation? That is the most interesting question of them all…
The buzzword “2.0” is so hackneyed in the new online world that it felt unfair to leave it out when discussing our upgraded site. The reality though is that this is the first step in producing the next stage of a RateSetter that we are extremely excited about.
The introduction of a 1 Year Bond – the first in peer to peer – is a landmark moment for RateSetter. Whilst it may seem like “just a new contract term”, it represents a great deal of what our vision of RateSetter is about: creating simple and great value consumer products using peer to peer as the engine. The 1 Year Bond is applied in creating 18 and 24 month loans, in tandem with the Monthly Access market. Creating a “composite loan”, funded from two different markets has been a technological feat for John and his team, and has involved rebuilding the back-end of our technology almost from scratch.
Our mission with this work has been to create technically advanced products that enable a very simple delivery for the user. The 1 Year Bond is a good example. Another is changing the “At Best” and “Rolling Rate” functionality that many Lenders use. We have simplified the functionality and naming across both markets so that they work in the same way. (You can see the specific changes on our Noticeboard.)
When a repayment is made, Lenders will have settings to manage reinvestment across any other RateSetter market. This is a first move towards setting “plans” that ensure Lenders are getting continual best value whatever their proposed lending term. We believe that simple configurable plans are important in addressing some of the complexity and idiosyncrasies that peer to peer lending can entail.
The graphic on our homepage states “RateSetting is Easy”. The overarching theme of this work is to continue to simplify products and the relationship between Borrowers and Lenders. Our Provision Fund – by creating a buffer between Borrower and Lenders – allows us to simplify matching and to reduce the emphasis placed on individual contracts. This holistic approach to diversification enables simplicity for Lenders and – we believe – a user-friendly and accessible money market that is a genuine alternative to a traditional banking or investment product.
This has been a major technological upgrade and has been in the making for some months. We intend to continue improving and enhancing the experience of lending through RateSetter, but whilst the technology may change, the same prudent principles of RateSetter still apply: safe returns for Lenders and low cost, flexible loans for creditworthy Borrowers.
We’re busily working on RateSetter 3.0 – watch this space.
Peter Behrens is RateSetter’s COO and Head of Credit and Risk.
Most people’s first question about peer to peer lending is “What happens when someone doesn’t pay back?!”
Managing risk at RateSetter is much like managing a football team: the Provision Fund is the showy striker, but it’s actually the stoic defenders – the Credit Approvals team – that do the hard yards ensuring that the Provision Fund can look impressive by doing as little as possible.
I thought it may be of interest for Lenders to understand how a Borrower is approved, and the kind of person that makes it through to borrow on RateSetter.
Borrowers usually come direct to the site, or from one of the many price comparison sites we work with, such as MoneySuperMarket or CompareTheMarket. In July this year, we introduced a screen called SmartQuote that has substantially improved our ability to quickly and efficiently profile our incoming Borrowers. In a matter of seconds, we credit score and profile the Borrower based on the information from one of the two credit bureaux we use. This automatically declines a proportion of incoming Borrowers who don’t fit our criteria. Those who qualify are given a personalised APR based on their circumstances.
They then fill in a secondary form that gives us a lot of the detail to make a decision – this is information about the Borrower and his circumstances: where he or she works, their household income and their monthly outgoings. Every application is manually assessed by the credit team, and we complete further credit checks, and often speak to the Borrower personally. I can’t divulge the precise criteria we use, but only about 10-12% of applicants meet the strict lending approach that we have. The whole process takes about a day to complete, which allows us to match Borrowers with Lenders quickly and efficiently. As well as being cheaper than a bank, it’s also important that we give them a more efficient and respectful service than they would get from a lot of traditional lenders.
We look to lend based on three key criteria – affordability, affordability and affordability. Everything we do is designed to ensure that Borrowers don’t over-extend themselves in what they can afford to pay back. Someone on £20,000 wishing to borrow 10% of her salary will almost certainly be a better Borrower than someone earning £100,000, but with lots of debt and wanting to borrow 25% of their salary.
The expectation of many people who don’t know RateSetter is that people are borrowing to get themselves out of debt problems, but in reality those people are very unlikely to qualify through our credit process. The typical Borrower is in his thirties, in a stable job earning £30-35k, owns his own property and is borrowing to buy a new car. They are people who have carefully managed credit over a period of years, and are aware of their obligations and indeed the penalties for mismanaging credit.
So far this approach has served us well, though we are in a never-ending process of subtly updating and improving our criteria. We’re fully aware though that over time the level of bad debt will rise – that’s when the Provision Fund can step in and claim the glory. But as all football managers know, it’s the unseen hard work that pays dividends.
RateSetter today celebrates our first full year in business. One year ago today, we launched RateSetter on an unsuspecting world, with the vision of creating great value Savings and Loans products between creditworthy Borrowers and smart Savers.
In that time, we have reached some terrific landmarks. We have matched just shy of £9m, across 2,400 loans, and 65,000 members. We regularly match more than £1m a month, and have helped create over £165,000 in interest for our Savers. You can see lots more here, (click through each stat to see more information).
Our Provision Fund has steadily grown, aided by the prudent lending decisions of my co-founder Peter Behrens and his credit team. Peter is a cautious man and I think that is a quality that RateSetter Savers will admire.
In our first year we believe we have proven our unique model works: in the past year, every single RateSetter lender has received every single penny of capital and interest that they expected. We have done the same job you would expect of a bank, with substantially better returns.
We have also worked with our “peer-to-peer” peers to establish an Association that delivers great clarity on the standards we feel are important and is a very positive step forward for the industry.
We owe a massive debt of gratitude to our Savers, who have backed a small company with a big idea, and without whom we would have never got the business moving forward. The best way we can repay that faith is to continue to cautiously bring lending opportunities to our market, and to grow our business in a sensible and measured way.
As we end our first year, we are very much looking to the future. We will look to improve our communications, website, operations and products. But we will also continue to keep our goals focused and simple – we are here to create the best value savings and loans products for our members.
Thank you for your support of RateSetter in its first year and as always please continue to let us know your thoughts.
It’s been a few weeks and it felt time to revisit the RateSetter blog to let you know what we’ve been up to.
It’s been a good summer to be indoors, diligently saving – while the rain has hammered our new logo’d windows, our growth has been strong, and we’ve been working hard on improving our processes and site to deliver a better experience.
We have enhanced our Borrower process to make it quicker to get a personalised quote – what used to take 24 hours now is done in a matter of seconds. As a result we now have a lot more time to spend on actually approving interested Borrowers (rather than reviewing applications from people just browsing). You can now see this separate borrower demand on the RateSetters page of the website.
This smoother process has meant more quality borrowers into the markets and our volume has picked up – in July, we matched over £1m in a calendar month for the first time. We have seen an increase in Lenders coming into the markets – both existing customers gaining confidence and new Lenders joining RateSetter.
The Rolling rate has ranged between 4.0% and 4.5% while the 36 month rate has come down as the marketplace fills up. The latter has the effect of making us more competitive in the loan marketplace, which is good news for Lenders: RateSetter will not compromise on the quality of the borrowers it approves and more competitive loan rates help the market grow.
We are often asked whether the Provision Fund has been used, and the answer is yes. The realities of a loan book are that people are occasionally late on their payments, and that defaults are inevitable. Money can move very fluidly between the Fund and Lenders, and the Fund continues to show consistent growth. The most important thing is that every single one of our Savers has received every penny of capital and interest that they have expected. That is our number one priority, and long may it continue…
In the coming months, we will continue to try to improve the site for both Borrowers and Savers. For example, we will introduce some enhancements to reduce the feeling of “an empty disco” which is sometimes how the site feels! Because a lot of Borrowers prefer to get matched quickly, they often take the best price available, rather than wait for someone to match them – this gives the impression that there are no Borrowers to lend to. Only the ever-rising “Amount Matched” figure assures people that the buzz of activity continues to happen every day. We will look to address this.
As always, we continue to receive varied and fascinating feedback, for which we thank you. We will continue to work hard to offer a good service and products that enhance your ability to earn a fair return on your capital.
As always, happy RateSetting!
I thought of that as I read an excellent guest editorial in CityAM this morning, a commentary from Ruth Porter of the Institute of Economic Affairs on the Chancellor’s announcement that the retail arms of banks will be ringfenced from their investment operations.
Regardless of the effectiveness of this policy – she makes a good argument that it won’t be – the point she makes later is the one I’d draw your attention to: “If consumers want the possibility of high returns they need to know their money may not be safe. On the other hand if consumers want caution and are happy to bear the cost of safe banking they should be able to opt for that.”
This is an important point and one that is often overlooked. The big hurdle, for most people considering dipping their toe into the water of peer to peer lending, is the question “Is it safe?” The truth is that effective management of your Savings requires an understanding of risk, and those who do have quickly seen the benefits of investing/saving p2p. They have realised the risk inherent in NOT carefully managing their money.
The good times have given many consumers an expectation of what their Savings “should” return, and an expectation of no risk. If anything, the banking crisis should have alerted everyone that every financial system has a level of risk, and that consumers should be wise to the different levels and to choose or diversify accordingly.
Complaints that “savings accounts paying an average of 0.77% are rubbish” are perhaps unfair – as Ms Porter suggests, if consumers want riskless banking, then they should understand there is a cost to it. Peer to peer has neatly filled a gap in the market of offering good returns for a small amount of risk.
“Safe” savings accounts should have small returns; “high risk” investments should have high returns. It’s incumbent upon the industry to explain those risks, for consumers to research them carefully, and for the media to explain them accurately.
Our Provision Fund is a unique approach to risk in peer to peer – and it’s one that is proving so far to be an effective and efficient one, with 100% of Savers receiving what they signed up for. However, it’s worth stressing – the Provision Fund is not an insurance product, and that is why we have our Principles of the Provision Fund to outline what the risks are and what Savers can expect.
Thanks for RateSetting – as always, let us know your thoughts